New Business and Manufacturing Approaches

The many product and service innovations just highlighted can play a key role in creating a more sustainable transportation system. But emerging process innovations in China may play a different role. A new approach to manufacturing could sharply reduce the cost of vehicles. Indeed, it's already having this effect. If these low-cost manufacturing processes are coupled with innovative low-carbon vehicles, the world will benefit.

This new manufacturing and business model started in America's computer industry but quickly spread to China, where it was embraced most avidly by the motorcycle industry. That industry accounts for half the world's production. From there it spread to China's nascent electric bike and scooter industry. Next could be companies producing low-cost autos.

Known as "localized modularization" and "open modular" manufacturing, this method is more flexible and decentralized than normal manufac-turing.46 Designers, suppliers, and manufacturers organize themselves into a dynamic and entrepreneurial network. Instead of dictating every detail of every part ordered from suppliers, as do the major automakers, in China these small manufacturers instead act as assemblers and specify only the important features, like size and weight. Suppliers are free to design and develop parts independently and thus are able to work with multiple firms. This industry structure typically results in increased competition and lower costs.

This industry structure doesn't rely on strong R&D capabilities or strong protection of intellectual property, making it well suited to China's nascent industries. Rather than patenting and protecting technology advances, companies are forced to continually innovate and push prices down. Competition is intense. The disadvantage is that absence of strong patent protection means companies don't invest in breakthrough technologies. But innovation, not invention, is the goal. Makers of electric scooters didn't need new technology to be successful. They just needed new ways of assembling the pieces in a low-cost way. The same was true with low-cost motorcycles, and the same could be true with small, inexpensive neighborhood electric cars.

This new approach is revolutionary in that it reduces start-up barriers. It breaks the hegemony of large international companies, which resist vehicles that don't, in their eyes, have mass-market potential. The benefits could be huge for China and other less affluent countries seeking small, energy-efficient alternatives to conventional cars. And this approach could make it easier to undermine the transport monoculture of the United States, which resists small vehicles.

On the other hand, by making cheaper vehicles available, this approach may mean that many more people will buy vehicles—undermining walking, biking, and transit. This threat is very real. In early 2008, a major industrial conglomerate in India, Tata, unveiled a car it intends to sell for only $2,500. The company and its suppliers started with a clean sheet. They created a small car that has a single windshield wiper and no radio, power steering, power windows, or air-conditioning. It has tiny 12-inch wheels with just three lug nuts to reduce costs; the trunk holds only a briefcase; and the instrument panel is rudimentary—just speedometer, odometer, and fuel gauge. But it seats five people and gets an estimated 50 mpg. Large global automakers had already been inclined in this direction. Their home markets in Japan, the United States, and Europe are saturated. Selling cheap cars in developing countries is a natural next step. Within months, many indicated they intend to follow Tata.47

Here's where policy is key: to align incentives correctly to make sure that new manufacturing approaches are used to introduce low-carbon vehicle technologies and not to flood the market with cheap, belching, inefficient vehicles. Leadership is needed in China to assure that the public interest isn't swamped by private desires.

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